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2. Let market demand be given by Q( P) = 200 ? P. Each firm’s cost...

2. Let market demand be given by Q( P) = 200 ? P. Each firm’s cost function is C(qi ) = 20qi , where i = 1, 2.

(d) Does each firm have an incentive to increase output? What is the optimal defection for each firm? What does this imply about the stability of their collusive agreement?

(e) Suppose that the cost function is now C(qi ) = 20qi + 400. What is the free-entry number of firms?

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